Vulnerabilty of East Asian Economies: The Importance of SWF

Vulnerabilty of East Asian Economies: The Importance of SWF

As the assets of sovereign wealth funds (SWFs) grew over the years leading up to the global financial crisis. Commentators in the West raised doubts about the intended objectives of these funds. For some, the rapid accumulation of financial assets in a relatively small number of foreign. State-run institutions threatened the power and prerogatives of domestic institutional investors (representing the ‘fifth’ stage of capitalism; see Clark and Hebb 2004). If nonetheless largely compliant, being enmesh in the reciprocal interests of complaisant boards of directors, ‘domestic’ institutional investors saw the incursion of ‘outside’ SWFs into Western capital markets as a threat to their hegemony.

Political fears

When combined with political fears about SWFs becoming owners of so-called ‘strategic’ national infrastructure assets like airports, ports, and telecommunications, the legitimacy of SWFs became an important issue for sponsors and for nation-states concerned about the influence of SWFs in domestic and international capital markets. The on-set of the global financial crisis saw a rapprochement between SWFs and Western capital markets. Desperate for market liquidity and for fresh injections of cash in struggling banks and insurance companies. A number of SWFs took significant positions in these firms only to see their stakes massively discounted by the effective failure of the UK and US banking systems.

Lost Confidence

As SWFs lost confidence in the performance and regulation of Western capital markets. Their inflows of cash turned to a trickle when international trade stalled and commodity prices declined. It became clear that SWFs were unlikely (and unable) to rescue Western markets. Indeed, it become apparent that their assets would be conserve in the interests of their sovereign sponsors—some SWFs appear to have become ‘sovereign welfare funds’. This paper looks at the retreat of SWFs from Western capital markets, arguing that, in a number of cases. They are bringing home to act as ‘insurers of last resort’.

Western Commentators

In case, surprising to a number of Western commentators, it is noted that this role derives from an implicit or explicit commitment of a number of East Asian governments to underwrite national welfare given their experience of global financial markets over the 1990s. Aizenman and Lee (2008, 593-4) refer to this policy as a form of foreign reserve “hoarding” wherein “precaution against financial fragility” has been amplified by mercantilist competition between nation-states.

This stands in contrast to the recent experience of Western countries, especially the UK and the US, where the lack of domestic savings, and institutions holding assets outside of government budgetary processes. It has meant that the public assumption of private debt (due to the global financial crisis) is to be paid for out of the current and future earnings of taxpayers. This is, perhaps, preferable to expropriating or discounting pension assets and benefits (see, respectively, the recent experience of Argentina and Ireland).

International Working Group

As a member of the International Working Group on SWFs, this developed the Santiago Principles. Singapore’s commitment to the Principles has helped to underwrite the international legitimacy of their SWFs. Against those Principles. The GIC has demonstrated a commitment to improving its disclosure and transparency. Indeed, 2008 saw the release of its first ever report describing how the fund is manages and govern. While this is encouraging, we are more interesting in the Singapore government’s own legitimacy in the context of the structure and performance of global financial markets. Barro (year of 2006) demonstrated that the probability of global financial crisis is higher than often assumed.

East Asian Economies

It has also be observe that East Asian economies are more vulnerable than most developing economies to financial volatility. This is because of their long-term export development strategies. As such, we suggest that there is an important role for SWFs as insurers of last resort in underwriting domestic economic growth and consumption. Following the suggestion made by Aizenman and Marion (in the year of 2004) amongst others. Development strategy and market exposure may give rise to problems of political instability if not anticipated by a ‘sinking-fund’ of some kind. We suggest that state legitimacy depends upon the extent to which government meets the fundamental interests of its citizens. Moreover the extent to which it can claim a sphere of autonomy in relation to other nation-states and multilateral institutions.

First Condition

The first ‘condition’ reflects conventional expectations as regards the proper relationship between the state and its citizens. We suggest that the second factor is crucial in understanding the importance of the GIC. As a small country, dependent upon the effective functioning of the global economy for its long-term welfare. Singapore— like other entrepôts—faces an ever-present threat: failure to be globally competitive. For that matter, overexposure to a failing global economy could result in it being held hostage to the policies of multilateral institutions or, far worse, the gradual erosion of national sovereignty.

It has been observed, for example, that the International Monetary Fund (IMF) claimed considerable influence over policymaking in a number of larger Asian economies in the aftermath of the 1997 Asian financial crisis. This incursion and the fear of future incursions into states’ sovereignty is what underpin reserve accumulation and the dissemination of SWFs around Asia.

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